The Roth Conversion Mistake That Can Raise Your Taxes
Roth conversions are often presented as a universal win. Pay taxes now, avoid them later, and enjoy tax-free income in retirement. But as this discussion highlights, the reality is far more nuanced especially for high earners and those nearing retirement.
For people in top tax brackets, converting traditional retirement accounts to Roth IRAs can create an immediate tax hit that takes years, sometimes decades, to recover. The benefits aren’t automatic, and in some cases, the strategy can quietly work against the investor.
Why tax brackets matter more than the Roth label
One of the biggest mistakes people make with Roth conversions is focusing on the account type instead of the tax bracket. For someone currently paying the highest marginal rates, converting large balances can mean locking in a tax cost that may be higher than what they would ever pay in retirement.
In the discussion, a high-income professional earning enough to fall into the 37% bracket questioned whether a Roth conversion made sense at all. That skepticism is well-founded. If taxes are paid at the top of the bracket today, the conversion only pays off if future withdrawals would have been taxed at similar or higher rates. For many retirees, that never happens.
The hidden cost of paying conversion taxes
Another overlooked issue is how conversion taxes are paid. Using money from a traditional IRA to pay the tax creates what the hosts refer to as a “tax leg.” That means additional income is generated just to cover the tax bill, pushing income even higher and reducing the net benefit of the conversion.
This can significantly delay the breakeven point of a Roth conversion. Instead of creating immediate flexibility, the strategy can require many years of tax-free growth just to catch up to where the investor started.
When Roth conversions make more sense
Timing is everything. The most effective Roth conversions often occur during lower-income years, such as early retirement before required minimum distributions begin. Converting while in a 22% or 24% tax bracket can be far more efficient than converting at the top of the tax scale during peak earning years.
For retirees with large tax-deferred balances, this approach can also help manage future RMDs, which may otherwise push income into higher brackets later in life. The key is patience and precision, not urgency.
The role of tax diversification
Rather than viewing Roth conversions as an all-or-nothing decision, the hosts emphasize tax diversification. Having money across taxable, tax-deferred, and Roth accounts provides flexibility. It allows retirees to control income year by year, manage tax brackets, and respond to changing rules.
Switching ongoing contributions to Roth accounts can also make sense, even if full conversions don’t. This builds future tax-free income without triggering large one-time tax bills.
Medicare and healthcare considerations
Taxes don’t operate in isolation. Higher income from Roth conversions can ripple into healthcare costs, particularly when income thresholds affect subsidies or premiums. In one example discussed, exceeding a specific income limit could result in losing substantial healthcare assistance, far outweighing the perceived benefit of converting more aggressively.
This is why Roth planning must be coordinated with Medicare and healthcare strategy, not handled in a vacuum.
No single answer fits everyone
Listener feedback reinforced a critical truth: Roth conversions are not inherently good or bad. Their value depends on income, timing, future tax expectations, and personal goals. Advisors who ignore how taxes are paid or assume future brackets will always be higher risk oversimplifying a complex decision.
For high earners and retirees alike, the takeaway is clear. Roth conversions can be powerful, but only when used deliberately. Understanding when not to convert can be just as important as knowing when to act.
Intended for educational purposes only. Opinions expressed are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Neither the information presented, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Consult your financial professional before making any investment decisions. Opinions expressed are subject to change without notice.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
